BECTU response to the Future Funding of the BBC report

28 October 1999

Introduction

BECTU's response to the Report on 'The Future Funding of the BBC' is set out below. As one of the organisations which gave written and oral evidence to the Panel chaired by Gavyn Davies we have a close and continuing interest in this issue - especially in the light of our 7,000 members at the BBC, as well as many freelance members working for the organisation.
We are strongly and fundamentally opposed to the privatisation proposals affecting BBC Resources and BBC Worldwide. While we also set out our position on some other aspects of the Report, our overwhelming priority is to outline why, in our view, the proposed privatisations are ill thought out and should be withdrawn. We are disappointed that this issue has received relatively little attention in the initial public debate on the Report, certainly compared to the digital licence fee issue. As a trade union we regard this as our single greatest concern and one on which we will be engaging in a public campaign.
We recognise that the Report, while commissioned by the DCMS, is the product of an independent Panel and does not constitute government policy. We sincerely hope that DCMS will take serious note of our views and will not be predisposed to adopt these privatisation proposals.

BBC Resources
The background
Resources Ltd comprises some 4,000 BBC staff with craft and technical skills who - working with the relevant equipment - provide the production and post-production facilities with which the BBC, supplemented by some independents, makes the bulk of its programmes (including sport, light entertainment and children's programme output). Only news and radio productions are excluded.
The Report states bluntly that 'the BBC should sell the bulk of BBC Resources Ltd' (p33). Without qualification or hesitation, the Panel is proposing a massive and irreversible privatisation of the BBC's programme-making facilities. We simply do not think the Panel has thought through the consequences and we believe it reveals not a boldness of vision but a lack of understanding of the broadcasting market.
In 1998 BBC Resources was incorporated into a wholly owned subsidiary - BBC Resources Ltd. At this time , a strong accompanying argument was that Resources Ltd would need a period of three to five years to build its business and develop a portfolio of contracts. Resources Ltd has itself forecast a move into profitability in the financial year 2000/2001. The privatisation proposal undercuts all of this and would impose a further drastic change of course before the last one (incorporation) has even had time to prove itself.
As the time of the establishment of Resources Ltd, the Secretary of State remarked that "I want to make sure that this cannot be used as a ramp for privatisation of the organisation" (Guardian 20 February 1999). We trust he will maintain that commitment.
The Report argues for privatisation as a means of developing the commercial potential of Resources. However, in a revealing paragraph, the Report goes on to undermines its own case: 'We recognise, however, that realising the value of Resources' assets will require detailed work, as the BBC's important craft base and therefore its creative capacity must not be undermined. And it is essential that any sale does not detract from the BBC's role as the UK's primary investor in core broadcast skills.' (p100). These objections are never properly answered. We believe they cannot be - privatisation of Resources is a damaging and ill-thought out proposal.

Funding the BBC's digital transition is not dependent on privatisation
The privatisation - with an assumed market value in the Report of £230million - is ultimately designed to release vital funding to the BBC in the transition to the digital era. On the contrary, we believe the funds released in this way are so small as to be irrelevant to that issue while inflicting long term and severe damage on the BBC as a producer/broadcaster.
The Report does not attempt to suggest explicitly that the sale of BBC Resources is a necessary part of providing the means to pay for the digital transition. It recognises that the proceeds of the sale should not be used as current expenditure, but rather as a fund for the BBC's future capital needs. It is clear, however, that the Panel believe the funding released by privatisation can contribute - directly or indirectly - to paying for digitalisation.
Close examination of the Report's figures (on p84) undermines this belief. The Report's proposals expect privatisation to produce £40million in each of the years 2002-3 to 2006-7, approximately half from Resources and half from Worldwide. But even if one accepts the improbably high capital valuation of Resources (£230million), its privatisation would produce an income representing only around 8.7% [1] of the extra money proposed by the Report for the period 2001-2 to 2006-7 (p84). At the other end of the scale, with an alternative estimated capital value of £100million (see below), the proportionally-reduced income contribution from the sale of BBC Resources Ltd would be only around 5% [2] of the total additional money for digitalisation. On either valuation, the financial contribution is so low as to remove any serious justification for privatisation on the basis of the funding released - directly or indirectly - for digitalisation.
We believe that there is a need for the BBC to be well funded in order to produce the kind of quality programmes to be broadcast on the digital channels which will encourage people to switch over from analogue. We simply do not believe that funding from privatisation is necessary to achieve this.
£230 million: a massive overvaluation
One of the weakest points in the Report's argument is the estimated valuation of £230 million. We would be interested to see a detailed justification for this figure. We believe it is based on nothing more substantial than a provisional 5 year business plan for Resources Ltd prepared by the previous Chief Executive Rod Lynch at the time of incorporation and expressing some broad initial assumptions about the likely growth of the business. This plan has now been discarded by the BBC. Furthermore, the credibility of these initial calculations is undermined by the first period's trading figures. Far from growth, results for the first 8 months' trading showed an operating loss of £5 million. This was not planned for and nor, we suggest, should the Government plan for privatisation proceeds of anything remotely approaching £230 million.
Approaching the problem in a different way, we pose the question of what, in practical terms, would be privatised?
4,000 staff
Apart from the hidden costs (see below), a key point is that there is no existing model within the independent facilities sector for a permanently staffed operation on this scale. The universal model is for a small elite of permanent staff, with an overwhelming majority of freelances engaged on a production by production basis. We do not, therefore, believe that any potential purchaser would be seeking to 'buy' the workforce as it stands. The labour force would not, in our view, be a factor justifying a high sell-off valuation.
Equipment/Hardware
Broadcast equipment quickly depreciates in value. From our knowledge of BBC Resources, the equipment tends to be longer through its service life than the industry average. The BBC Resources Annual Report's valuation of equipment at £101million could itself be an overestimate. As the report points out, equipment is not revalued on an on-going basis since it is "used within the company rather than being held for resale or ..... investment potential" [Note 1 (e)]. It would certainly not, in our view, contribute to a high sell off price for Resources.
Property e.g. studio space
We assume that the vast majority, if not all, of the property currently used by BBC Resources will remain with the BBC, i.e. there is no question of selling off property otherwise integrated into sites that will remain part of the BBC's continuing operations.
Access to BBC contracts
Is this the prize justifying a sale price of £230 million? We think not, for the following reasons:
- Unlike the privatisation of BBC Transmission, there is simply no guarantee of the BBC as a long term continuing customer.
- Most of the BBC contracts held by Resources Ltd are not long term contracts. They are subject to the BBC's annual commissioning cycle and will often be on a show by show basis.
- There is strong and increasing competition from other broadcaster-based facilities bidding for work, e.g. the London Studios (LWT), 124 (Channel 4), Carlton Studios (Nottingham), Scottish, Yorkshire, Anglia. The broadcaster-facilities marketplace is already crowded, let alone competition from long-established independent facilities houses.
For all of these reasons we simply do not accept that the valuation of £230 million for Resources Ltd has any credibility. One can accept or not alternative valuations as low as around £100 million [3]. The point is that on all independent assessments of which we are aware, the Report's figure has to be massively discounted - thus bringing into question the rationale behind privatisation in the first place.
Hidden costs of privatisation
Not only has Resources Ltd. been vastly overvalued in our view but there are significant costs attached to privatisation which were totally unrecognised in the Report. This would further reduce the proceeds made available to the BBC by the sell-off. The areas of concern relate to redundancies, pensions, buying-in facilities and the EU public procurement directive.
Redundancy
The BBC Redundancy Agreement provides staff with an entitlement to 1 month's pay per year of service.
In previous privatisations (e.g. Transmission, Finance), agreement was reached between the BBC and the new employers on compensation for anticipated redundancy liabilities, i.e. the BBC made available a sum to cover redundancy pay entitlements based on transferring employees' past service with the BBC.
Given an estimated average length of service in BBC Resources Ltd of 18 years and average pay of £20,000, this would trigger a potential total redundancy liability of £30,000 x 4,000 = £120 million. Such a sum would massively reduce the value of the privatisation.
Pensions
Almost all of the 4,000 BBC Resources Ltd staff, given their likely length of service, will be members of the BBC pension scheme, which has a total of 16,500 contributing members and a current £250 million surplus.
The BBC may have to take account of recent litigation concerning the right of transferring employees. This may support the right of transferring employees to take their share of any surplus in such an occupational scheme.
For 4,000 staff, on a pro-rata base, this could take £60 million out of the surplus and severely affect the BBC's future pension planning.
Buying-in facilities: a sellers' market
Post-privatisation, the BBC would have no choice but to buy-in facilities on the private market.
It could be faced with a serious escalation in costs from a sellers' market in production, post-production and outside broadcast facilities whenever the BBC is required to undertake its 'broadcaster of last resort' role.This is when large-scale technical facilities have to be mustered at short notice for national events or crises such as the funeral of Diana, Princess of Wales. A further example is the forthcoming coverage of the Millennium celebrations . The BBC will provide 27 hours continuous coverage with worldwide links. This is matched by no other British broadcaster and is only feasible because of Resources' in-house facilities. Once privatised, the advantage is lost and the Corporation will be forced to pay what the external market requires.
We believe these factors have not been accounted for in the Report and weigh yet further against the notion of privatisation as a financial benefit to the BBC.
The Public Procurement Directives
The EU directives require certain public contracts with a value exceeding £250,000 to be subject to a legally-based tendering process. If the BBC is left without the option of using in-house facilities, then each and every contract of this kind could, in consequence, require additional administration as well as taking a significantly longer time (thereby possibly stifling or restricting creative opportunities). Far from extending the options open to BBC producers, such a development could limit them. Under the current system they can investigate the possibility of using external facilities without becoming subject to such a formal, legally-based process. Privatisation would remove this operational freedom and could, we believe, lead to increased administrative costs.
Breakup of our largest integrated technical skillsbase
Privatisation would not simply transfer Resources Ltd from the BBC to the private sector. It would also, in our view, lead to the break-up of Resources as an operational entity. On both counts this would be a serious long-term loss not just to the BBC but to our whole broadcasting sector.
BBC Resources is the single largest craft and skills base in British broadcasting. Despite the loss of several thousand jobs in recent years (pre and post incorporation as Resources Ltd), the skilled technical and creative staff involved have contributed enormously to the quality and technical excellence of the BBC's programme output. This has regularly been acknowledged by the industry and as recently as 1998 Resources staff won as many as nine of the prestigious Royal Television Society Craft and Design Awards. They are responsible for some 60% of BBC production (including some commissioned productions under the independent quota) and won over £20million of external business in the first eight months trading as Resources Ltd (despite cost cutting and the loss of 200 jobs during that period). It bears repeating that the Report itself stated as its aim - in respect of Resources - that 'the BBC's important craft base and therefore its creative capacity must not be undermined' (p 100).
It is relatively easy to destroy a skills base such as this, but once destroyed the damage is irreversible. The effects of privatisation would include:
1. The separation of the BBC's production function (i.e. creative grades such as producers and researchers concerned with initiating and implementing programme ideas) from its technical implementation through Resources. Contrary to all the most recent trends in broadcasting towards the integration of production and resources functions (including multiskilling) the BBC would be compelled to lose a whole dimension of in house skills to the external market. Resources' has a track record of contributing to the development of new programme-making techniques (e.g. desk-top editing, light weight picture gathering), and production and technical skills are likely to converge further in the digital future. This change would represent not a preparation for the digital future but a step back from it.
2. A specific problem concerns the core infrastructure functions currently part of Resources, e.g. operation of channel play-out centres, master control, the engineering of communication links. These are critical functions which almost no other British or European broadcaster buys in from third parties and yet the BBC would be deprived of them in-house.
3. The likely break-up of Resources itself either during or immediately following privatisation. There can be no assumption of a single bid for the whole of Resources. Much more likely would be a cherrypicking process in which individual elements within Resources, e.g. editing, outside broadcast, are separated. As already indicated above, wholesale casualisation of the workforce through redundancy is a further inevitable consequence in line with the overwhelmingly freelance labour market in the independent facilities sector.
4. Reduction of the role of BBC to that of publisher broadcaster. Privatisation of Resources would leave the BBC, unlike most other broadcasters such as their ITV competitors, in a halfway position of having thousands of creative staff (such as producers and researchers) in-house, but no technical Resources staff to implement their ideas. The subsequent casualisation of the creative production staff as well is highly predictable, rendering the BBC - currently seen as one of the world's premier producer broadcasters - as a shrunken publisher broadcaster with no more than a rump of in-house news output. On the contrary, we believe that both production and Resources staff should remain in-house - in line with the usual pattern for major broadcasters.
The loss of broadcasting's technical training ground
Privatisation would inevitably lead to the destruction of what the whole of the audio-visual industry acknowledges as the single largest technical training ground in the UK. The BBC invests more in training both in absolute terms and as a proportion of its budget than any other British broadcaster. Corporate annual spending on training is in excess of £30m, representing 2.5%+ of payroll expenditure.
The BBC genuinely trains for the whole industry, since many skilled staff who enter via the BBC subsequently move on to jobs elsewhere. This unique centre of technical training would be completely lost in the divided-up, casualised future post-privatisation. Government policy - which is so supportive of training throughout the rest of the economy - would ironically have contributed to destroying the largest technical training resource in British broadcasting. It could be argued that other parts of the industry should make a greater contribution to training but until that happens the loss of the BBC's contribution would be disastrous. We must first face the question - who, if not the BBC, would train for the industry?
BBC Worldwide
The proposal for Worldwide is 'to sell a stake .... sufficient to take the effective private involvement in its total external operations to 49%' (p33). This may stop short of outright privatisation but qualitatively changes the organisation completely.
The exact nature of the sale remains unclear. While its scope excludes the joint ventures and branded channels, the remaining non-channel operations are open to either stock market flotation or to 'the sale of minority stakes to business investors'. The latter option 'may be' more appropriate but 'how such a sell off is structured requires detailed work and professional advice' (p97). We oppose the 49% sell off by any means. We are even more concerned when the Report's sell off proposal is accompanied by this degree of uncertainty about how to implement it.
We question the Report's basic assumption that Worldwide is failing to any degree sufficient, to justify such a sell-off in the first place.
- Worldwide has achieved a steadily rising cashflow back to the BBC: from £54million in 1997-8 to £81million in 1998-9 (including a £55million investment in BBC programmes).
- Its 1998-99 results showed turnover up by 6 % (to £446 million), pre-tax profit up by 67 % (to £20million) and operating profit moving from a £7million loss to a £12million profit. Group turnover has grown steadily by 12 % per year over the last 5 years.
- Programme distribution (i.e. television sales) grew by 7 % to £135million, with profit in this aspect of the business up from £6million to £13million.
- Despite the closure of 2 underperforming magazines, BBC total magazine circulation rose by 9 %, in the context of an overall UK market decrease of 3 %.
- BBC publications as a whole include strong individual success stories by any standard:
  - Radio Times, a continuing market leader, has maintained circulation of more than 1.4million
  - Other BBC magazines are leaders in their field, including Home and Antiques (turnover up 17 %) and Gardener's World (sales of £10million).
  - Individual recent successes include David Attenborough's Life of Birds (a massive seller in book and video form) and Delia Smith's How to Cook (a million copies sold by early 1999)
These are not the attributes of a commercially failing organisation. On the contrary, Worldwide continues to show every sign of being able to fulfil its target of quadrupling its cashflow to the BBC during the current Charter period, achieving a figure of £210million by 2006.
The notion that a 49% sell-off is necessary to inject a new commercial culture into Worldwide is false. Although the Davies proposal relates only to non channel activities the report does not reflect the existing extensive private investment in its activities. The channel operations of Worldwide already have private resources of £210 millions invested. This money is to be found in its joint venture channels operated with Discovery and Flextech (UK Gold, UK Horizons and UK Arena) and is set to grow. Furthermore, the existing culture in Worldwide is already that of a progressive and aggressive marketing company distinct from the creative and bureaucratic culture of its parent body, the BBC Virtually all senior executives have a strong background in the commercial sector, including Rupert Gavin from BT, Jeff Taylor from Sony and Peter Teague from Unisys. A vigorous commercial approach - if such is being sought - is already in place.
The 49% sell-off could be positively harmful in the following ways:
1. It could limit the vital ingredient of BBC strategic control and therefore its ability to ensure that Worldwide's activities are consistent with the Corporation's general policies and values. The current equilibrium between the broad strategic aims of the BBC's Policy and Planning Department and the commercial pressures on Worldwide could readily be destroyed by the introduction of a 49% external commercial interest.
2. The likely result would be the dilution of the strength of the BBC brand, which is Worldwide's major selling point.
3. The potential loss of some individual areas of Worldwide (e.g. international books/videos) would reduce the company's ability to globally market a brand.
4. The probability at some point of conflicting strategies with the outside companies owning significant stakes in Worldwide could lead to an incoherent corporate strategy.
5. Worldwide currently invests in developing BBC programming on a long-term basis, sometimes backing ideas which may not be immediately profitable and allowing a degree of experimentation. This is unlikely to continue under the short-term priorities imposed by commercial investors. Recent examples include:
  - Walking with Dinosaurs (which arguably would not have got off the ground in the time it did without Worldwide's confident and early backing and promotion).
  - Teletubbies (which ran into considerable early criticism about whether it was suitable children's programming).
  - TV Chef Ainsley Harriott.
  - Michael Wood (writer and presenter of, for example, 'Alexander the Great').
6. Cross-subsidy is allowed within Worldwide (since this is a commercial operation and does not cross the line into the BBC's publicly-funded activities). This can deliver additional long-term success (eg the revenue-earning capacity of Radio Times bought time for initially struggling titles such as Match of the Day and Good Homes to develop into successful publications) but would be much less likely to happen if constituent parts of Worldwide had different external investors.
As with Resources, we fear the proposed 49% sell-off of Worldwide is an example of short-term thinking likely to cause long-term harm. Essentially, the BBC would be compelled to sell-off half of its major commercial assets for a one-off capital gain but at the cost of a long term and permanent reduction in rights and in income flow. Access to perhaps the major single programme archive in world broadcasting would be sold off to outside interests who made no contribution to investing in that resource.
This is compounded by the strong probability that the 49% would be sold off in piecemeal fashion with bidders seeking to cherry-pick the most profitable parts of the organisation (such as The Radio Times). As already indicated, notions of BBC corporate strategy, unified branding, long-term investment and cross-subsidy are weakened if not removed altogether in these circumstances.
We continue to believe that much of the public criticism of Worldwide rests simply on the self-interest of commercial competitors who resent a public corporation playing an effective role in the market place and who wish to roll back the BBC's share for their own gain.
We therefore believe the 49% sell-off is not justified by Worldwide's track record nor by its prospects. Improvements in performance can rightly be required of this as of any organisation without need for such a drastic measure causing potential long-term harm. Furthermore, we believe that Worldwide can deliver more value back to the BBC by partnership arrangements on a business-to-business level than by a 49% sale. We urge the Government to reject this proposal.
BBC public accountability and financial transparency
The Report makes a number of specific proposals, summarised on p108, to increase the financial transparency of the BBC. They are for: an OFT review of the Fair Trading Commitment and Commercial Policy Guidelines; National Audit Office reviews of the BBC accounts process; separate and published annual fair trading audits; and a quarterly complaints bulletin on the these issues.
Our view is that transparency measures should go even further. We have long been concerned about the cost of management consultancies at the BBC (totalling £28 million in 1997-98 alone); about remuneration policies for senior management; and about the true costs of the Corporation's internal market mechanism, Producer Choice. Given that the BBC is a labour-intensive organisation, greater transparency in the employment area is as important as transparency in the fair trading area.
The Report raises the question of the BBC's financial accountability as a result of considering the BBC's funding arrangements (p145). It raises the question of the position of the BBC's Governors as being problematic - since although the Governors are the main instrument by which the BBC is rendered accountable, they are serviced by a secretariat which is part of the staff of the BBC; and consequently the Governors are often regarded very much as part of the management of the BBC. (p146)
While we would like to see a more representative Board of Governors we also believe they should be serviced by a secretariat independent of the BBC. We further believe that, with due public debate and consultation, the Governors should undertake specific additional obligations:
- to provide a clearer definition of public service broadcasting that can be easily translated into performance criteria for assessment;
- to review the BBC accounts process;
- to publish separate annual fair trading audits and a quarterly complaints bulletin on these issues;
- to publish details of the remuneration policies for senior management.
We believe that clear and meaningful separation of the Governors from the management of the BBC provides an opportunity for coherent independent public accountability and removes the need for National Audit Office inspection rights (which would open up the prospect of direct government interference, thus setting a dangerous and damaging precedent). We would like to see the separated Board of Governors charged with the commitment to greater information disclosure and to require of the BBC greater transparency of operations which could enable broader and informed public debates on the BBC's role and purpose.
Charter renewal and beyond
We note that the Report concludes that 'the role and financing of the BBC should be subject to a root and branch reassessment at the time of Charter Review in 2004-6' (p6). Our concern is that while the Report includes some useful analysis of the value and role of Public Service Broadcasting (PSB) in the future, its conclusions are in our view far too tentative. We would like to see a firm and unequivocal commitment to the BBC as our major public service broadcaster, to be funded by the licence fee well beyond the Charter Review.
We can quote the Report itself in support of a long term future for the BBC as our key public service broadcaster:
- 'We do believe that PSB, however defined, can play an important role in the competitive and complex broadcasting environment of the multichannel, digital future. There is good reason to suppose that the market, left to itself, will not provide the broadcasting which our society wishes to foster.' (p137).
- 'There is a continuing need to support the public policy aims of quality, diversity, choice and accessibility'. (p138)
- 'Free-to-air broadcast programming, as provided by the BBC, has a claim to remain a focal point for a shared and diverse culture and the quality benchmark for UK broadcasting'. (p138)
Furthermore, the Davies committee annex on Market Failure In Broadcasting as well as the earlier work of economist Andrew Graham and others sets out strong theoretical justifications for a continuing central role for the BBC:
- 'economic theory suggests that, rather than removing the case for PSB, the commercial pressures and globalisation that are reinforced by digital technology could increase the need for such a broadcaster'. (p205)
- 'although the new technology has removed one source of monopoly, spectrum scarcity, it has replaced it with another, the natural economy of economies of scale. Rather than promoting free competition, there is a risk that the digital era will foster high concentration in private broadcasting'. (p205)
- public policy requires a 'positive force' to 'act as a counterweight to private concentration of ownership'; to 'provide a centre of excellence which both makes and broadcasts programmes'; to be large enough to influence the market; and to widen choice through public service provision. (p207). That 'positive force' is surely a licence fee-funded BBC.
In our view, a continued commitment to a licence fee-funded BBC should be a central feature of public policy, for all of the above reasons. It should not be contingent on fluctuations in the BBC's audience share. A firmer commitment to the BBC's long term future beyond the Charter Review is, in our view, both necessary and justified.
Conclusion
We urge the Government to reject the Report's proposals on the privatisation of BBC Resources Ltd and (part of) BBC Worldwide. We believe there is no justification on financial grounds since the funding released by privatising Resources will make no significant contribution to the BBC's digital funding needs. It is certain, however, that privatisation will be deeply damaging to the future of the BBC as our major public service producer-broadcaster. It would be tragic if, on the basis of these ill-considered short-term proposals, a Government which has so far been strong in its defence of the BBC's role should set in motion policies which would break-up the Corporation's technical skills base and invite a longer term decline into a publisher-broadcaster only.
The precise future development of Resources and Worldwide is surely, in our view, an operational matter for the BBC. The recent history of both organisations has seen considerable change and there is no reason to believe the BBC incapable of further adaptations - if necessary - in the future. There simply seems no need for Government to interfere at this micro level in the internal business affairs of the organisation.
We believe the Government's desire to ensure a successful transition to digital broadcasting can be realised without need for privatisation at the BBC. We hope that - despite the general focus of debate on the future of the licence fee - the issue of privatisation will receive adequate critical scrutiny in the coming period. We believe that if due consideration is given to the arguments it should be clear - as it certainly is to us - that the future of the BBC and of its component parts in Resources and Worldwide lies together, not apart.

Footnotes

Total additional licence fee income plus privatisation income is £1147m. On the presumption that half the privatisation income is from Resources (ie Resources' contribution is £100m), Resources delivers only 8.7% (ie £100m is 8.7% of £1147m).
Given that the total capital value of the privatisation is thereby reduced from £430m to £300m (only 69% of the previous total), we reduce the privatisation income generated by a proportional amount (69%) to £139.5m, giving a new total (licence fee + privatisation) income of £1086.5m. BBC Resources now contributes only a third of the capital value and therefore, we presume, a third of the income ie £46.5m, which is less than 5% of £1086.5m.
Based solely on the valuation of equipment in Resources' Annual Report - given that the value of other factors needs to be heavily discounted and (as argued below) additional costs need to be taken into account.

Last updated 1 November 1999

BECTU response to the Future Funding of the BBC report

About